Compound Annual Growth Rate (CAGR) is a metric used to measure the average rate of return on an investment over a specific period of time. CAGR takes into account the compounding effect of investment returns, which means that it considers not only the initial investment but also the returns generated by that investment over time. This metric is often used in finance and investment analysis to evaluate the performance of an investment or a portfolio of investments.
CAGR Calculation and Formula
To calculate CAGR, you need to know the beginning value and the ending value of an investment over a certain period, typically several years. The formula for CAGR is:
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) – 1
CAGR can be expressed as a percentage or a decimal. A higher CAGR indicates a higher rate of return, while a lower CAGR indicates a lower rate of return. CAGR is a useful tool for investors to compare different investment opportunities and determine which ones have the potential for higher returns over the long term.